Mining policies may mar plans of divestment

Mining policies may mar plans of divestment

Mumbai: The government’s plan to raise around 10,000 crore by divesting its stakes in three state-run companies won’t likely be smooth sailing, investment bankers say. All three companies belong to the mining sector that’s found itself under a policy cloud and the shadow of scandal.

On Friday, the department of divestment of the finance ministry started the divestment process by inviting bids from merchant bankers to manage the sale of stakes in NMDC Ltd, National Aluminium Co. Ltd (Nalco) and Neyveli Lignite Corp. Ltd (NLC).

At least half-a-dozen investment bankers Mint spoke with over the weekend said government policies on pricing, production, supply and clearances in the mineral and mining sectors that need greater clarity will play a key role in influencing investors in the process of divestment.

The mining and mineral sector has also been mired in scandal. Last month, a report by the government auditor, the Comptroller and Auditor General of India, alleged irregularities in the allocation of coal blocks that it estimated led to notional losses of 1.86 trillion to the treasury. The report followed a ban clamped on iron-ore mining in Karnataka last year by the Supreme Court, which was partially lifted this month.

The government, which holds a 90% stake in NMDC and 87.15% in Nalco, plans to sell 10% and 12.15%, respectively, in the firms through the so-called offer for sale (OFS) route on the stock exchanges. In NLC, the government will reduce its stake by five percentage points from 93.56%. In an OFS, shares are sold through an auction on the stock exchange.

At current market prices, the three issues may fetch the government around 9,800 crore, but typically in a follow-on offering, shares are sold at a discount.

Even if the issues are priced at a steep discount to attract investors, unless the government’s policies on the businesses of these state-run firms are spelt out clearly, the shares may not perform after their listing, investment bankers said. The lack of clarity on policy may keep investors away, they said.

“Markets are unlikely to improve overnight to convince investors just by cheap pricing. Unless the government sets a clear policy for sectors from which companies are divesting shares, investors will not buy shares," said the director of capital markets at a large domestic investment banking firm.

The next challenge will be pricing because all these stocks are already listed. The follow-on public offering (FPO) of Oil and Natural Gas Corp. Ltd, for instance, had to be bailed out by Life insurance Corp. of India, the director said. The FPO price was too close to its trading price at that time, keeping investors away.

Mining and mineral sector stocks have had a poor record on the stock exchanges in the past year. Barring a few private sector companies, most mining and mineral stocks have lost heavily. NMDC and Nalco shares are trading around 19% and 22% below their last year’s levels, respectively. NLC stock is around 10% down from its year-ago level. In the past one year, BSE Ltd’s benchmark Sensex has risen 3.63%.

“Government’s policy-related issues will certainly have a bearing on foreign institutional investor participation," said another official at a bank-controlled investment banking firm.

None of the bankers quoted in this report was willing to be named given the sensitive nature of the issue.

“This is not the right time to launch public issues, but the government has its own compulsion. OFS will mitigate risks of beating down the stock price before the issue, which used to bother investors in case of follow-on public issues," the second banker said.

If the share sales still manage to sail through, they will provide impetus to the market, he added.

Last year, the government raised 13,894 crore against a target of 40,000 crore.

The latest round of divestment is coming at a time when the mining sector is battling challenges in securing environmental approvals and permission to expand mines or smelters, acquiring land and access to raw materials.

State-run coal producer Coal India Ltd, which raised around 15,000 crore in 2010—the country’s largest initial public offer—has run into criticism from minority shareholders resentful of the government policy of fixing coal prices far below international levels.

The Children’s Investment Fund, a UK-based hedge fund, cried foul when the government forced Coal India to roll back a price increase and compelled it to sign 20-year fuel supply agreements under a presidential directive.

Mining in other metals and minerals has also been clouded by political and regulatory issues.

Vedanta Aluminium Ltd (VAL), a unit of the London-listed mining conglomerate Vedanta Resources Plc, plans to shut its $2 billion alumina refinery in Orissa indefinitely from 5 December because of a shortage of key raw material bauxite. It has already sent a notice to the state government, according to a 6 September Reuters report.

The debt-laden and loss making VAL had been operating the refinery with bauxite purchased from other states after its environmental approval to mine bauxite in Orissa was withdrawn June 2011.

India, the world’s fifth-biggest bauxite producer, has been curtailing bauxite mine leases because of local protests over land acquisition.

The Supreme Court on 3 September lifted a 16-month ban on iron-ore mining in Karnataka on 21 mine leases that had not flouted their lease provisions, but analysts said this will not radically change the scenario.

The apex court had banned mining in the iron-ore rich region of Bellary, Chitradurga and Tumkur districts in 2011 because of illegal mining and environmental degradation, abruptly shutting down iron ore supplies to steel and iron makers from Karnataka—India’s second-largest iron ore-producing state after Orissa— with output of about 45 million tonnes (mt) of iron ore a yearand a sizable portion of exports, mainly to China.

When mining ground to a halt, several ancillary or downstream units also get affected. In Karnataka, for instance, the demand for iron ore was about 40 mt before the ban. “Since then, several of the smaller sponge iron units have shut down," D.V. Pichamuthu, southern regional head of the Federation of Indian Mineral Industries, was quoted as saying in the 3 September edition of Mint. “It will be a long time before we hit the 30 mt upper limit."

The top official at a large foreign investment bank said the prices of the stocks of such state-run firms have already factored in these uncertainties.

“Often in a bad market, the issue sails through if the pricing is correct. The policy-related issues do have a bearing but it is for existing as well as new investors. Block trades of around $2.5 billion have happened this calendar year which suggests that there is enough liquidity," he said.

Still, 30,000 crore seems to be too ambitious a divestment target for the government to meet this fiscal year.

Bhuma Shrivastava contributed to this story.